Pat McKeough recently responded to a Member of his Inner Circle who asked for his opinion on the shares of one of the most famous luxury brands in the world.
Tiffany & Co. continues to grow internationally, with a particularly strong presence in the lucrative Asian market. The company also aims to attract younger consumers with new designs and online shopping. Pat notes that a consumer shift to fashion jewelry has helped the company improve its high profit margins.
Q:Pat, I’m thinking of buying shares of Tiffany & Co. Can I have your recommendation on the stock? Thanks.
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A: TIFFANY & CO. (symbol TIF on New York; www.tiffany.com) is a leading international retailer, designer, manufacturer and distributor of fine jewelry and gift items. These include watches, clocks, sterling silverware, china, crystal, stationery and fragrances.
Tiffany is based in New York City and operates 315 stores (124 in the Americas, 87 in Asia-Pacific, 54 in Japan, 46 in Europe, and four in the UAE). It also sells its products online.
Overall revenue rose 5.5%, from $4.03 billion in 2013 to $4.25 billion in 2014. Revenue tailed off 3.5%, to $4.10 billion in 2015, and then a further 2.4%, to $4.00 billion in 2016. It then rose 4.3% to $4.17 billion in 2017.
A one-time arbitration award expense of $480.2 million limited earnings in 2013 to $181.4 million (or $1.41 per share). Earnings jumped 167.0%, to $484.2 million (or $3.73 per share) in 2014, although they slumped 4.2%, to $463.9 million (or $3.59 per share) in 2015. Profit fell again in 2016, to $446.1 million (or $3.55 per share).
Despite an increase in revenue, earnings fell a further 17.0% in 2017, to $370.1 million (or $2.96 per share). That drop was due to a charge of $146.2 million in the fourth quarter related to new U.S. tax rules. Excluding this one-time charge, earnings rose 15.7%, to $516.3 million (or $4.13 per share) in 2017 from $446.1 million (or $3.55 per share) in 2016.
For the three months ended January 31, 2018, Tiffany’s revenue rose 8.1%, to $1.33 billion from $1.23 billion a year earlier. Meanwhile, excluding one-time items, earnings for the quarter rose 14.5%, to $208.1 million, or $1.67 a share, from $181.8 million, or $1.45, a year earlier.
Growth stocks: New CEO was former head of youth fashion label Diesel
Tiffany benefits from operating in a high-profit-margin industry and has been able to steadily improve its margin in each of the past five years; that figure rose from 58.1% in 2013 to 62.5% in 2017.
Tiffany also continues to make inroads in the attractive Asia/Pacific region, where its brand has a strong luxury reputation. Consumer spending, especially in China, also remains strong.
The company continues to benefit from a consumer shift toward fashion jewelry. (Fashion jewelry primarily consists of non-gemstone gold and silver jewelry and typically offers much-higher profit margins than traditional diamond products.)
As well, last year, Tiffany hired the former head of youth fashion-label Diesel as its new chief executive officer. Before that, Alessandro Bogliolo worked 16 years at luxury jeweler Bulgari. He’s now focused on attracting younger consumers to Tiffany with new designs and online shopping.
The company’s balance sheet is sound: it holds cash of $1.3 billion, or $10.46 a share. Its long-term debt of $882.9 million is just 7.5% of its $11.8 billion market cap.
With the July 2017 payment, Tiffany raised its quarterly dividend by 11.1%, to $0.50 from $0.45. The shares now yield 2.0%. The stock trades at 21.6 times the fiscal 2018 forecast earnings of $4.35 per share.
Inner Circle recommendation: Tiffany & Co. is okay to hold.
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